Even though the use and possession of cannabis is illegal under federal law, 33 states and the District of Columbia have passed laws legalizing marijuana in some form. In June, Illinois became the 11th state in the US to legalize marijuana for recreational use. With every voting cycle, the stigma around marijuana seems to shed a bit more and VC interest in cannabis spikes at a phenomenal rate. And this year, which still has over five months to go, has already collected significantly more VC funding in the space than any year ever, according to PitchBook data:
Despite hefty tax rates and complicated local regulations, more than 40% of the capital for cannabis startups this year has gone to companies headquartered in California. The Golden State was the first to legalize medical cannabis in 1996 and roughly 20 years later, it gave the green light to recreational marijuana, too. Now, it is home to some of the most valuable VC-backed cannabis businesses in the US, including PAX Labs and Eaze.
The biggest deals in cannabis
Speaking of PAX Labs, the San Francisco-based company secured $420 million in April and attained unicorn status at a $1.7 billion valuation, marking the largest-ever deal for a VC-backed cannabis company in the US. The cannabis vaporizer manufacturer spun out of Juul in 2017 and is backed by investors including Tiger Global and Redmile Group.
But it's not just the popular vape maker that's raking in all the cash this year. Surterra Wellness, a developer of cannabis-based medical products, reportedly raised $265 million across two rounds. The Atlanta-based company is backed by investors including Valkyrie Capital and former Patrón Spirits CEO Edward Brown. Even though recreational marijuana is expected to emerge as the biggest driver of growth within the cannabis industry in a few years, medical marijuana led the global market share at 70.3% last year, according to research firm Grand View Research.
Grassroots Cannabis, another provider of medical cannabis products, holds the fifth spot on the list. The Chicago-based business announced on Wednesday that it has agreed to be acquired by Curaleaf for a combination of cash and shares valued at some $875 million.
The top VC investors in cannabis
So far this year, Florida-based Phyto Partners boasts the largest portfolio with a total of nine deals. The early-stage VC was founded in 2015 and focuses on investments in the cannabis industry. Notable deals in 2019 include Green Flower, which operates a cannabis education platform and Wurk, the developer of a payroll and HR platform for marijuana businesses. The firm also holds a stake in Eaze, the provider of an on-demand marijuana delivery service; it was valued at $315 million in December. Gotham Green Partners, which is tied with Arcadian Fund as the second most active investor in cannabis startups, participated in a $125 million round for Flow Kana in February. Founded in 2014, the business partners with small family farms to cultivate sun-grown cannabis flowers.
The cannabis market in the US is expected to grow at 24.1% over the next six years, again per Grand View Research. And while several cannabis companies such as Hexo (NYSE: HEXO) and CannTrust (NYSE: CTST) have been tumbling on the stock market in recent months, the possibility of innovative products and increased market size seem to make a compelling argument for VCs to cut hefty checks toward pot businesses. To put it bluntly: 2019 has been lit so far.
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Related read: The Wild West of the budding cannabis industry